Money Market Funds are taking off, and clearly lots of people are stuffing cash into them.
However, I have 2 questions:
1/ How far do you think their yield will climb?
2/ When do the pundits expect their yield to start falling?
I currently have about 17% of my portfolio in the Abrdn Stirling Money Market fund, which is now yielding 7% and still climbing like a rocket. I am starting to think I should put a good deal more in, leaving me with a load of “near cash” to reinvest if/when the recession/slow down hits the USA/World.
In the USA, the underlying instruments (the things that money market funds buy with the money we deposit) have just begun to see lower rates. So that means that the money market yields will drop shortly. “Shortly” because the money market funds only invest in very short-term dated instruments. I don’t know the current trajectory of short-term interest rates in Sterling. But the principle would be the same.
@NuclearNev the income from MMFs is based on the investments held in the funds. Some funds hold short-term U.S. government Treasury bills. Others hold corporate paper.
Usually the duration is short (90 days or less). This makes the yield of the fund highly responsive to current short-term interest rates.
Your MMF’s yield of 7% is significantly higher than the 5% yield of Treasury MMFs. This implies higher risk of default of the underlying debts.
Read the fund prospectus to see the content of the fund. Then try to find out the trends in the short-term interest rates. These are the 30-day T-bill yields.
The options market predicts that the fed funds rate, which underlies the T-bill rate, will begin to drop in about 3 months. This is a guess by options traders.
A high-yielding MMF probably holds commercial paper which could be at risk of default in a recession. During the 2008 financial crisis the Federal Reserve stepped in when a MMF almost “broke the buck.” Would it do the same in 2024? Nobody knows since there was political pushback against the Fed supporting investors who took market risk.
His MMF is denominated in UK Sterling which may have different prevailing interest rates than the US$ has right now. I have no idea though what those rates are at the moment.
Almost the same as the U.S.
In that case, be suspicious of the 7%. Very suspicious!
Hmmm, I see the risk. Thanks for your input.